Analysis: Cargo's impact in rumored American-US Airways deal

Thursday, January 31, 2013

Even though the surface seems calm, things are moving behind the scenes in the merger between American Airlines and US Airways.
Nothing is official and no documents — aside from a non-disclosure agreement — have likely been signed, but there have been reports of steady movement between the two parties toward the end goal of collaboration.
The Wall Street Journal has reported that Thomas Horton, chief executive officer of American’s parent company, is jockeying to become chairman of the combined company, though US Air wants its CEO to run the company. Dividing the company equitably between shareholders is another sticking point in the talks, apparently. Finally, the Associated Press talked with AMR bondholders who want the two companies to merge by Feb. 15.
When Richard Anderson, CEO of Delta Air Lines, said on a conference call late last year that he predicts the big four U.S. airline market will, and must, shrink to three in 2013, he was doing more than making an educated guess. A combined American/US Air would dwarf Delta.
The merger between two of the biggest airlines in the United States is driven by passenger traffic and revenue, but looks to be a wash for cargo. In the fourth quarter of 2012, US Airways turned in passenger revenue, both mainline and express, that totaled just more than $2.9 billion, representing a 2.2 percent rise in mainline revenues and a 7.7 percent increase in express revenues, year over year. For the year, US Airways officials said they posted the highest annual profit in company history.
Passenger operations, it seems, are doing well. But cargo revenue finished the quarter at $41 million, a 3.9-percent decline when compared to the same period in 2011. For the year, 2012’s $155 million in cargo revenue ended as an 8.4-percent drop. These significant declines have been happening to carriers the world over, but the small amount of cargo revenue shows that moving freight isn’t a big part of US Air’s business model. For American Airlines, mainline passenger revenue ended the fourth quarter at $4.4 billion, a basically flat change from the fourth quarter of 2011. Cargo revenue, though, declined from $171 million in 2011 to $170 in 2012. Cargo ton miles declined by 1.2 percent to 436 million, but yield rose by 0.5 percentage points when compared to the fourth quarter of 2011. Regardless, cargo is a big part of what American does.
In May, American welcomed a new head of cargo operations, Kenji Hashimoto, who has overseen the end half of the carrier’s restructuring process and will run things as American Airlines tries to hit management’s goal of 20-percent growth over the next seven years. American has also been bullish about buying new planes, taking 30 new aircraft during 2012. The haul includes two Boeing 777-300ERs, which will provide for better cargo service and might replace smaller planes, pushing them into different routes. When all is said and done, the carrier will receive nine new 777-300ERs, which will be used on routes from the United States to Europe and Latin America. The company has 59 deliveries scheduled for 2013.
So a co-mingling of businesses won’t necessarily add much to cargo activity. US Airways concentrates mostly on passenger traffic, while American has a robust cargo team. As Dave Ross at Stifel Nicolaus recently noted, a lot is up in the air when two carriers merge together. If both carriers have significant belly space and don’t end up taking any capacity out of the skies when they link up, there’s no impact on cargo. In the current market, though, removing capacity could benefit them both.
“If somehow they get together and cut routes and eliminate belly space, that’s going to be a net positive for the air cargo industry because it will at least prevent pricing from falling further,” he said. “If freight is shifting out of the air and onto the ground, you’re going to need capacity to come out in order to hold rates.” - Jon Ross